Apple versus the EU Commission.

On Tuesday 30 August, Margrethe Vestager the head of the EU Commission’s competition policy, announced that after a three year investigation it had concluded that a tax agreement between Apple and the Irish government had gone beyond a tax incentive and had become a ‘state aid’ – and thus was illegal. As a result the Commission estimates that Apple will have to pay tax back in the region of 13bn Euros, plus interest.

The Commission said Ireland enabled the company to pay substantially less than other businesses, in effect paying a corporate tax rate of no more than 1%. Ireland and Apple both said they disagreed with the record penalty and would appeal against it and even the US Treasury has warned the EU about it’s actions and described events as ‘deeply troubling’ (reminding us that the different authorities take very differing views of where profit is created).

Ms Vestager said the Irish tax system “allowed profits to be attributed to a head office that only existed on paper.” The EU Commission press release continued ‘The rulings endorsed a way to establish the taxable profits for two Irish incorporated companies of the Apple group (Apple Sales International and Apple Operations Europe), which did not correspond to economic reality: almost all sales profits recorded by the two companies were internally attributed to a “head office”. The Commission’s assessment showed that these “head offices” existed only on paper and could not have generated such profits.’

Whilst the eventual outcome of this case is still far from clear that is not the case in respect of the underlying messages – the commentary coming from the EU Commission directly picks up on what it believes is a lack of genuine economic substance in its structure. We continue to see corporate cross border structures, existing and proposed, which have very little substance to them – this development sends a very clear message that a lack of substance (actual or even perceived) will be attacked by the authorities. National tax authorities, including HMRC, will be looking at the EU Commission announcement and this will undoubtedly frame and shape their own thinking going forwards when dealing with multinational enterprises and how they approach lower level cases. UK businesses with overseas entities therefore need to be aware of this and consider whether the EU Commission announcement impacts them.